According to a Form 4 filed with the SEC, on April 2nd Kohl’s Corporation (NYSE:KSS) Board member Stephanie Streeter directly purchased 2,500 shares of stock at an average price of $45.38 per share. This brought her direct holdings to a little over 6,400 shares if restricted shares are included; therefore, it is a significant percentage increase in her stake in the company. For an insider to buy shares in their company at all, we would think they would have to be more confident than usual in its prospects; otherwise, economic theory would suggest that it would be smarter to diversify wealth away from the company rather than further increase company-specific risk. Studies of insider trading have shown that stocks bought by insiders narrowly outperform the market on average (read our analysis of studies on insider trading).
Kohl’s Corporation (NYSE:KSS) increased its revenue by 3% in its most recent fiscal year (which ended in early February 2013) compared to the previous fiscal year, though same store sales were flat. In addition, the company’s costs were also considerably higher and so earnings fell by 16%. Numbers for the fourth quarter of 2012 versus a year earlier were essentially in line with those for the rest of the year. Kohl’s Corporation (NYSE:KSS) brought in $1.3 billion in cash flow from operations, which actually less than they spent in total on share buybacks and dividends (the stock pays a 3% dividend yield, going by current prices and recent dividend payments).
At a market capitalization of $10 billion, the department store trades at 11 times trailing earnings. A multiple at that level would be appropriate for a company with stable earnings, and we’re not convinced that Kohl’s Corporation (NYSE:KSS) can sustain its current financial performance given that its net income has been down in the past year. Analyst expectations are for very low growth, with a forward P/E of 10. Anthony Bozza’s Lakewood Capital Management reported a position of 770,000 shares in Kohl’s Corporation (NYSE:KSS) at the end of December (see Bozza’s stock picks) while Pzena Investment Management disclosed ownership of a little over 650,000 shares (find Pzena’s favorite stocks); however, these positions are small compared to the largest positions in other similarly size retailers.
Other department stores include Macy’s, Inc. (NYSE:M) and those owned by The TJX Companies, Inc. (NYSE:TJX). Macy’s, Inc. (NYSE:M) is in a similar situation to Kohl’s: its earnings multiples are low (for example, the trailing P/E is 13), but earnings have not been particularly good, falling slightly in its most recent quarter compared to the same period in the previous fiscal year. The sell-side is more bullish when it comes to Macy’s but we still think we would avoid the stock at this time. The TJX Companies, Inc. (NYSE:TJX) has been reporting double-digit growth rates on both top and bottom lines, and even though some future earnings growth is already assumed in the stock price- the stock carries trailing and forward P/Es of 19 and 15, respectively- it might be worth looking into the company to see how sustainable those growth rates are.
We can also compare Kohl’s to Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT). Each of these large discount retailers trades at 15 times trailing earnings. Revenue growth at the two stores has been modest; while Wal-Mart managed to increase its earnings by 9% last quarter compared to the fourth quarter of its last fiscal year, Target’s was down slightly due to lower net margins. Wal-Mart Stores, Inc. (NYSE:WMT) in particular is also notable for its low market exposure with a beta of 0.4, which helps make it a standard defensive stock. Both Wal-Mart and Target Corporation (NYSE:TGT) are expected to grow their earnings at a similar rate going forward.
Wal-Mart, then, might be worth investigating as well as TJX in terms of alternatives to Kohl’s. Kohl’s and Macy’s seem to be having similar troubles in terms of their financial performance, and so even though they are trading at cheap multiples (and Kohl’s has this insider purchase as well) they don’t seem to be good buys right now as their current pricing only makes sense if they can keep their earnings steady to slowly growing over the next several years.
Disclosure: I own no shares of any stocks mentioned in this article.